D.C. Current

How the GOP Will Cave on a Budget Deal

The budget-balancing plan offered by Paul Ryan last week will make it easier for Republicans to jump ship, as it relies on Obama's tax increases as well as the tax revenues and Medicare reductions under Obamacare.

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The latest idea from market pundits is that investors need not heed the political antics in Washington, D.C., because the U.S. economy is more resilient than the dysfunctional federal government and able to leap tall buildings without a single Ben. I've heard this sentiment in recent days on cable and seen it on Twitter and on the cover of a financial magazine.

I come from the camp that says the stock market would not be at its current lofty levels except for Ben, and that the sequestration law is going to hurt as much as President Obama says it will hurt, setting off a public-relations disaster for the GOP. Furthermore, the Republicans already have lost the budget war, and if you miss the story, you miss some investment opportunities, particularly in defense.

As voters begin to howl about long airport lines and other inconveniences in coming months, I expect enough GOP defections to give Obama his compromise deal.

The Republican budget-war defeat became evident last week when House Budget Committee Chairman Paul Ryan of Wisconsin introduced a fiscal blueprint to balance the federal budget in 10 years. Ryan could not have done it without cribbing from Obama. As Steven Dennis of Roll Call pointed out, Ryan relied on Obama's $600 billion tax increase, tax revenues from Obamacare, and $700 billion in Medicare reductions under the same law. Ryan would repeal Obamacare -- except for those features. Ryan advertized his plan as a rebuke to the president's fiscal policies, but it grudgingly came across as a concession to some of the president's arguments. This will make it easier for Republicans to jump ship and support an Obama-inspired compromise budget that cuts entitlement spending in return for eliminating tax breaks for high earners.

As I wrote two weeks ago, the GOP leadership does not have firm control of its troops, and Obama needs only 17 House Republicans to join up with House Democrats for a deal. As many as 60 Republicans have opposed the House leadership in votes this year, for a variety of reasons. Some of them don't think Speaker Boehner is conservative enough. Some think he's too inflexible and should compromise more.

As the chart accompanying this story shows, there are exactly 17 Republicans in districts that went for the president in 2012. They are up for election in 2014. That's not to say these are the ones who will defect; but if I were the president, these are the members of Congress with whom I'd be breaking bread. And I would be running intensive get-out-the-vote drives in their districts as well.

The conventional wisdom is that Republicans have a midterm election advantage because turnout will be about half of what it was in the general election. The powerful Obama grass-roots political organization could turn that wisdom upside down in 2014, especially if voters are as angry about budget cuts as I believe they will be. These 17 Republicans must be uneasy, including ones who ordinarily don't face serious election foes -- Ileana Ros-Lehtinen, Peter King, Frank LoBiondo, and Gary Miller, for example. Their constituents voted for President Obama. They demonstrated a willingness to split their ticket, not blindly vote for one party's slate. Lawmakers in Florida and New Jersey -- states that went big for Obama -- would strike me as most promising prospects for presidential outreach.

In the Senate, Obama needs only five of the 45 Republicans for the required 60 votes in that chamber, assuming that the 55 Democrats, including two independents, support him. South Carolina's Lindsey Graham already has broken with his GOP leadership by trying to broker a deal with Obama. Susan Collins of Maine has never been a GOP stalwart. Three more won't be a problem when sequestration nudges the misery index higher.

Under the compromise, defense spending likely would be cut back more gradually and less deeply, under the cover of provocative actions by the Chinese, the Iranians, and the North Koreans.

That axis of lunacy is the best lobby our defense industry has had in ages.

So go ahead and loathe dysfunctional Washington -- but ignore it at your financial peril.